All Class Construction, LLC v. Mutual Benefit Ins. Co. was a case brought originally in Maryland state court and removed, on the basis of diversity, to the United States District Court for the District of Maryland. Plaintiffs All Class Construction, LLC (“All Class”), William Chaffman, David Dzergoski, and John Cirone, alleged two (2) causes of action against Mutual Benefit Insurance Company’s (“Mutual Benefit”): (1) violation of Maryland statutory law for failure to act in good faith in denial of All Class’s claim for coverage; and (2) breach of contract or third-party contract. Relying upon the provisions of the relevant insurance policy, the Honorable District Judge James K. Bredar granted Mutual Benefit’s motion for summary judgment and motion to dismiss All Class’s claim against Mutual Benefit for a breach of good faith and fair dealing.

The policy provided for commercial property coverage and commercial general liability coverage, and was issued on December 6, 2012, to nonparty BOC Masonry, LLC, for a policy period of January 28, 2013 to January 28, 2014. On February 19, 2013, the policy was amended to add All Class, also located in Carroll County, Maryland, as an insured. By its terms, the amended policy included, as insureds, the members and managers of All Class, and it seemed to be understood by all parties to the instant suit that Chaffman, Dzergoski, and Cirone fell within that definition. Specifically, the policy provided coverage for “personal and advertising injury liability”; if the policy applied, the coverage included Mutual Benefit’s duty to defend the insureds against any suit seeking those damages. “Personal and advertising injury” (hereinafter, “P&A Injury”) was defined to mean the following: injury, including consequential “bodily injury”, arising out of one (1) or more of several enumerated offenses. The policy defined “advertisement” as: [A] notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters. The Declarations page limited the P&A Injury coverage to $1 million per person or organization and provided a “General Aggregate Limit” of $2 million.

On April 5, 2013, the underlying plaintiffs—WGG, Inc., and Window Specialists, Inc. (collectively, “WGG”) - sued Dana LeCompte, individually and d/b/a L.I. Glazing, L.I. Glazing, All Class, Chaffman, Dzergoski, and Cirone in federal district court, Middle District of Pennsylvania. Neither LeCompte nor L.I. Glazing was a party to the Maryland action. Essentially, the underlying complaint alleged that WGG entered into several contractual arrangements with LeCompte who, in exchange for becoming an officer of WGG and accepting certain forms of compensation, agreed to merge his sole proprietorship, L.I. Glazing, into WGG and assign certain valuable contracts to WGG. Despite his contractual obligations, LeCompte was, at the same time, working secretly with Chaffman, Dzergoski, and Cirone to form All Class and to assign the same valuable contracts to All State that he had assigned to WGG; further, he was providing information to WGG’s newly assigned contracts customers and its bond and surety company that caused WGG to be in default on at least one (1) contract, to lose other business to All Class, and to incur damage to their customer relationships. LeCompte also allegedly solicited new business on behalf of All State, in derogation of his obligations to the WGG, and allegedly stole WGG’s confidential information and trade secrets, which caused WGG irreparable damage by deleting significant customer information from WGG’s computer system. Although the primary bad actor was alleged to be LeCompte, All State, Chaffman, Dzergoski, and Cirone were alleged to be complicit in LeCompte’s maneuverings. The Pennsylvania federal case was settled “in an amount exceeding $300,000.00.”

In the Maryland action, All Class alleged that it submitted a claim for coverage to Mutual Benefit in May or June of 2013, but Mutual Benefit wrongfully denied coverage. The district court began its analysis by stating that, pursuant to Maryland statutory law, an insured may bring a civil action against an insurer under a property and casualty insurance policy. Such a suit (1) must be used to determine coverage and/or entitlement to payment, (2) must allege that the insurer failed to act in good faith, and (3) may seek actual damages under the policy, expenses and litigation costs, and interest on expenses and litigation costs. MD. CODE ANN., CTS. & JUD. PROC. § 3-1701(d). The statute defines “good faith” as “an informed judgment based on honesty and diligence supported by evidence the insurer knew or should have known at the time the insurer made a decision on the claim.” Section 3-1701(a)(4). The court observed, however, that the statute negates any claim of failure to act in good faith “solely on the basis of delay in determining coverage or the extent of payment to which the insured is entitled if the insurer acted within the time period specified by statute or regulation for investigation of a claim by an insurer.” Section 3-1701(f). According to the district court, Mutual Benefit unpersuasively posited that the $1 million per person or organization limit for P&A Injury took the case out of the All Class’s asserted exception to administrative exhaustion. The court also stated that because the claim was based upon two (2) underlying plaintiffs, then the two (2) organizations together were subject to the “General Aggregate Limit” of $2 million, which exceeded the $1 million upper limit for administrative exhaustion. Consequently, the district court concluded that the All Class’s claim was not subject to the administrative exhaustion process.

Further, even if Mutual Benefit’s denial of coverage constituted a breach of contract under the insurance policy, the denial letters upon which All Class directly relied as the basis of its claim for breach of good faith and fair dealing did not support a reasonable inference of lack of good faith. Thus, the district court concluded that the standards of reasonable investigation, honest assessment, and reasonable explanation, were satisfied. The district court also noted that even if Mutual Benefit considered, in its first denial letter, policy provisions that were inapplicable to the claimed loss, All Class could not claim it was unaware that its policy included P&A Injury coverage, because the denial letter quoted provisions relating to P&A Injury coverage, and All Class’s attorney asserted that All Class was entitled to P&A Injury coverage in his subsequent request for reconsideration.

Finally, with respect to Mutual Benefit’s motion for summary judgment, the district court stated the well-settled law in Maryland that an insurer’s duty to defend “should be construed liberally in favor of the policyholder.” Pac. Emp’rs Ins. Co. v. Eig, 864 A.2d 240, 248 (Md. Ct. Spec. App. 2004). The duty to defend arises “when there exists a potentiality that the claim could be covered by the policy.” Id. (internal quotation marks omitted). As stated by the Maryland Court of Appeals, the determination of whether an insurer has a duty to defend in a tort suit is ordinarily based upon the answers to two (2) questions: (1) what is the coverage and what are the defenses under the terms and requirements of the insurance policy?; and (2) do the allegations in the tort action potentially bring the tort claim within the policy’s coverage? St. Paul Fire & Marine Ins. Co. v. Pryseki, 438 A.2d 282, 285 (Md. 1981).

With regard to the first assertion, the district court presumed, arguendo, that the few references in the complaint to false information being supplied to potential and existing customers included false statements about the WGG’s business and that these statements could be considered slanderous, libelous, or disparaging of WGG’S goods, products, or services. Nonetheless, the court determined that one (1) of the exclusions to P&A Injury coverage operated to bar All Class’s claim to coverage—namely, the exclusion for material published with knowledge of falsity applies based on the allegations that indicate All Class and LeCompte well knew that the information supplied to customers was false. Alternatively, All Class’s claim that the underlying complaint alleged “wrongful use of the trade name/trade dress ‘LI Glazing’” was still not enough to fall within the second claimed definition of P&A Injury. As to that definition, coverage was only available for injury arising out of “infringing upon another’s copyright, trade dress or slogan in an ‘advertisement.’” For these reasons, the district court concluded that, while the policy included P&A Injury coverage, the allegations of the underlying complaint did not bring All Class’s claim within the scope of P&A Injury coverage. Therefore, the district court agreed with Mutual Benefit’s denial of coverage, granted Mutual Benefit’s motion for summary judgment on the breach of contract claim, and dismissed All Class’s breach of contract claim for failure to state a claim.